A $700 Billion DROP In The Market BUCKET ?

Will the Bush Administration's recently proposed $700 Billion 'RTC 2' Financial Rescue Plan prove to be just a DROP in the proverbial Market BUCKET ??? THAT becomes the $60 TRILLION financial system question after digesting the below insightful data courtesy of Douglas Cliggot, the Chief Investment Officer of Dover Management Group:

* According to 2008 data made available from the Federal Reserve, The U.S. financial sector began the year with approx $62.7 TRILLION worth of banking assets ($700 Billion is about 1.1% of this)

* About 20% or $5 TRILLION of this $62.7 TRILLION was effectively transferred earlier this year from the private sector to the public sector with the nationalization of Freddie Mac (FRE) and Fannie Mae (FNM)...leaving U.S. banks with approx $57 TRILLION of outstanding assets ($700 Billion is about 1.2% of this)

* Of the $55 TRILLION in public U.S. banking assets, the face value of outstanding U.S. mortgages currently represent approx 25% or $14 TRILLION of this amount

* Applying a 10% DEFAULT RATE (probably a fair assumption given the current morose state of the U.S. economy) to U.S. banking assets (including loans of all types - residential, commercial, consumer including auto, etc.), would result in about $5.5 TRILLION of U.S. assets being wiped out...a somewhat TERRIFYING amount of wealth destruction considering the fact that the U.S. financial sector entered 2008 with only $4.6 TRILLION in total equity capital (equity capital: the sum of money raised from owners of a company via the issuance of stock + retained earnings) !


Data Courtesy: Douglas Cliggot + CNBC

Top 10 Hardest Hit 'Wall Street Towns'

Make no mistake about it, Wall Street's epic slowdown will have a severe economic impact to individuals living both INside and OUTside of New York City. For my reference, a Businessweek-created List of the Top 10 Towns that will most likely be hit the hardest as a result of Wall Street's recent collapse:

Businessweek's List of Top 10 Hardest Hit Towns

1. Darien, Connecticut
Share population in finance and real estate: 27.23%
Nearest large city: New York
Population: 20,666
Median salary: $168,687

2. Bloomington, Illinois
Share population in finance and real estate: 26.31%
Nearest large city: Chicago
Population: 70,395
Median salary: $54,971

3. Hoboken, New Jersey
Share population in finance and real estate: 23.33%
Nearest large city: New York
Population: 40,002
Median salary: $81,356

4. West Des Moines, Iowa
Share population in finance and real estate: 22.15%
Nearest large city: Des Moines
Population: 54,627
Median salary: $61,303

5. Garden City, New York
Share population in finance and real estate: 20.22%
Nearest large city: New York
Population: 21,671
Median salary: $121,831

6. Summit, New Jersey
Share population in finance and real estate: 19.74%
Nearest large city: New York
Population: 20,618
Median salary: $111,497

7. Westport, Connecticut
Share population in finance and real estate: 19.39%
Nearest large city: New York
Population: 26,822
Median salary: $137,133

8. University Park, Texas
Share population in finance and real estate: 18.83%
Nearest large city: Dallas
Population: 24,582
Median salary: $110,976

9. Wethersfield, Connecticut
Share population in finance and real estate: 18.73%
Nearest large city: Hartford
Population: 26,146
Median salary: $63,359

10. Mountain Brook, Alabama
Share population in finance and real estate: 18.66%
Nearest large city: Birmingham
Population: 20,654
Median salary: $115,148

Towns-That-Could-Be-Hit-Hardest-by-the-Financial-Crisis

Data Courtesy: Businessweek

Wall Street's 2003-07 Housing BOOM Exces$

During the 5 year U.S. Housing 'BOOM' from 2003 to 2007, Wall Street's 5 Largest firms (Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Sterns and Lehman Brothers) paid their Top 5 Executives a total of more than $3 Billion in compensation!


Three BILLION dollars is of course a stunning amount of money in ANY context but especially so when considering the rather DIRE solvency/financial challenges these same firms have faced over the course of the past 6 months...NAMELY:

* Bear Sterns (the artist formerly known as BSC) was forced into bankruptcy in March

* Lehman Brothers (the artist formerly known as LEH) was forced to declare bankruptcy in September

* Merrill Lynch (MER), in order to avoid being forced into bankruptcy, was forced to sell itself to Bank of America (BAC) in September

* OH yeah, don't forget about that little $700 BILLION Wall Street 'Bailout/Rescue Plan' that was just approved by Congress this weekend !

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According to the informative Bloomberg article linked below:

* The 5 Wall Street firms had combined Net Income (profits) of $93 Billion during the five years through 2007

* Of the $3.1 Billion paid to the top five executives at the firms between 2003 and 2007, Goldman Sachs (GS) paid the highest total with $859 million, followed by Bear Stearns at $609 million...CEO pay at the five firms increased each year, doubling to $253 million in 2007, according to data compiled from company filings

* Merrill Lynch (MER) paid its chief executives the most, with former CEO Stanley O'Neal taking in $172 million from 2003 to 2007 and John Thain receiving $86 million, including a signing bonus, after beginning work in December 2007

* Bear Stearns CEO James Cayne made $161 million before the company collapsed in March and was sold to JPMorgan (JPM) with monetary backing provided by the U.S. Federal Reserve

* Hank Paulson, the current U.S. Treasury Secretary and former CEO of Goldman Sachs, made about $111 million from 2003-2006...current Goldman Chief Executive Officer Lloyd Blankfein received $57.6 million in 2007

* Morgan Stanley's (MS) current and former chief executives, John Mack and Philip Purcell, were paid about $194 million over the last five years.

* Lehman's Chief Executive Officer Richard Fuld made $165 million between 2003 and 2007

* Lastly, it should be noted that Excessive compensation was NOT limited to Wall Street's top executives as Wall Street firms have paid employees a greater share of revenue than any other industry, about 50%...The five Largest firms paid their 185,687 employees $66 Billion in 2007, including about $39 Billion in bonuses...That amounts to an average pay of $353,089 per employee, including an average bonus of $211,849.

bloomberg.com/apps/news?pid=20601109&sid=aGL5l6

Data Courtesy: Bloomberg

Full Disclosure: I own shares of GS.

Warren BUFFETT Ch-Ch-Chooses GOLDMAN

Warren BUFFETT, the uber-BILLIONAIRE and CEO of Berkshire Hathaway (BRK.A or BRK.B), must be an avid reader of this blog. How else can you explain his recent purchase of 'bank-holding' company Goldman Sachs (GS)?? I (wrongfully but still gleefully) credit my 8/27/08 post titled 'RTOB: Six Reasons to BANK on Goldman' for showing the 'Oracle of Omaha' the light. UNwarranted and completely nonsensical boasting aside, here are some of the intriguing details behind Warren's newly acquired 10% stake in Goldman Sachs :


* Berkshire Hathaway Inc. agreed yesterday to a $5 Billion preferred stock investment in Goldman...this will immediately provide Berkshire a 10% interest in GS (effectively valuing GS at $50 Billion...fyi, at $129/share the current marketcap of GS is $51 Billion)


* Buffett also reserves to the right to buy an additional $5 Billion in GS common stock sometime during the next five years at $115 a share.(anecdotally thinking...looks like he is getting an Amazing deal here)

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* FYI + During these turbulent times, Buffett's been pretty busy in terms of putting his $40 Billion of CASH into the markets as Berkshire has announced 9 acquisitions since October 2007, compared with 6 in the prior 12 months, when his largest deal was $350 million to buy VF Corp. (VFC), an underwear and pajama maker


* By mid-2008 (note, not 'through' 2008), Buffet's cash holdings have officially declined to $31.2 Billion from $44.3 Billion at the end of 2007.


* This year, Buffetts' Largest Deals include:
1.) $4.5 Billion purchase of Marmon Holdings Inc., the Pritzker family's collection of 125 companies, in March
2.) $4.7 Billion bid this month for Constellation Energy Group (CEG), the largest U.S. power seller
3.) Buffett also provided $6.5 Billion in April to help Mars Inc. buy Wrigley (WWY), giving Berkshire a stake in the chewing gum maker.
4.) Buffett also pledged $3 Billion in July to Dow Chemical Co.'s (DOW) $15.4 Billion takeover of Rohm & Haas Co. (ROH)


* Buffett's other $IGNIFICANT FINANCIAL stakes include:
1.) Wells Fargo (WFC - 9% stake)
2.) US Bancorp (USB - 4% stake)
3.) American Express (AXP - 13% stake)
4.) Wesco Financial (WSC - 80% stake)
5.) Moody's Corp. (MCO - 20% stake...even the greatest get it wrong sometimes)
* Buffett's Berkshire Hathaway is the Largest Shareholder for these 5 companies


* Buffett also owns less significant stakes in other financials including: Bank of America (BAC - 0.2% stake), M&T Bank Corp. (MTB - 6% stake) and Suntrust Bank (STI - 1% stake)

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Random
Thoughts
Of Brilliance: In this chaotic market the PSYCHOLOGY of shareholders matters perhaps more than anything else. Even though Goldman is giving Berkshire a bargain on its shares (I'm referring to the follow-up $5 Billion stake at $115/share), you CANNOT underestimate the psychological importance of being able to tell the investing public that Warren Buffett, arguably the world's $aviest investor of ALL TIME, is firmly behind your company and stock. I think this is a GREAT move for shareholders of both Goldman and Berkshire. Lastly, it will also be interesting to see how shares of GS react in the next 6 months to a year...wonder if this move by Buffet will end up marking the bottom in GS shares.


bloomberg.com/apps/news?pid=conewsstory&refer=conews&tk

http://www.cnbc.com/id/22130601/


Data Courtesy: Bloomberg + CNBC.com
Full Disclosure: I own shares of GS.

CHART - % Of Delinquent U.S. Mortgages

Per the below August 04, 2008 Chart from the New York Times...a somewhat sobering look into the SHARE (%) of DELINQUENT Subprime, Prime and Alt-A Residential Mortgages (click on the chart for a LARGER image) :




Data Courtesy: New York Times

U.S. 'New' Home Prices Off 12% From Peak

According to the U.S. Commerce Department, the MEDIAN Price of a NEW home in the United States has fallen 12% from the housing bubble-induced peak in March 2007.

bloomberg.com/apps/news?pid=20601109&sid=aSW356GUarw4&refer=home




Data Courtesy: Bloomberg

Washington's $700 Billion 'RTC' Rescue Plan

In order to avert an all out CRISIS in the U.S. financial system, the Bush administration is seeking UNPRECEDENTED authority to step in as a 'Buyer of Last Resort' for up to $700 Billion worth of U.S. mortgage-related assets. Per the below Bloomberg link, DETAILS of the $700 Billion RTC-type rescue plan :


* The plan seeks 'unchecked' power from Congress (the bill would prevent courts from reviewing actions taken under its authority) to buy $700 Billion in bad mortgage investments...for some perspective, this sum is roughly equivalent to the combined annual budgets of the Departments of Defense, Education and Health and Human Services

* The proposal would raise the United States' national debt to $11.315 TRILLION from $10.615 TRILLION and require the U.S. Treasury secretary Hank Paulson to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that

* Types of 'Assets' covered under the plan include: home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve Chairman, Ben Bernanke, "other assets, as deemed necessary to effectively stabilize financial markets''...Treasury may buy only assets issued or originated on or before September 17th, 2008

* Hank Paulson is also asking for the power to hire asset managers and award contracts to private companies...The Treasury may hire managers to purchase the assets through 'reverse auctions', seeking the lowest prices

* The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program

* Most provisions of the proposal will expire 2 years following the date of enactment

* The plan will include curbs on executive pay for the companies whose assets the government will be buying

* The proposal will also most likely include a plan to stem mortgage foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration (The FHA), the Federal Deposit Insurance Corp. (The FDIC), Freddie Mac (FRE) and Fannie Mae (FNM)

bloomberg.com/apps/news?pid=20601087&sid

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FYI, This is NOT the first time a MASSIVE 'bad asset purchase' plan similar to one above has been proposed + ultimately implemented by the U.S. Government to avert crisis in the financial system:


* According to Wiki, "The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision, as a consequence of the 1980s-90's U.S. Savings and Loan Crisis... In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation. Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 Billion."


http://en.wikipedia.org/wiki/Resolution_Trust_Corporation


Data Courtesy: Bloomberg + Wikipedia

Fitz On Housing + Wall $treet's Impact On NY

Per RealMoney.com contributor Dan Fitzpatrick, behold some somewhat obvious but nonetheless poignant words I believe are worth noting related to what's needed for a BOTTOM + Sustainable Recovery in U.S. Housing/Real Estate prices:

The Order of Economic Recovery

By Dan Fitzpatrick
9/19/08 11:30 AM EDT

"Just a quick note this morning. Those who are eagerly looking at the real estate market with optimism that the worst is over are looking the wrong way. Houses are the ultimate Big Ticket Item. They are generally not bought until the consumer feels confident in his earning capacity by way of a steady JOB with upside potential. We need an economic recovery BEFORE real estate moves higher...not the other way around. It has always been that way, and will always be that way. Not my opinion -- it is a fact."

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* Anecdotally thinking and speaking of real estate, one of the select FEW pockets of strength for the post-2005 U.S. real estate market was Manhattan, New York. This will most certainly NOT be the case moving forward for at least the next 5-10 years following the EPIC collapses of former WALL STREET giants Bear Sterns (the artist formerly known as BSC), Lehman Brothers (the artist formerly known as LEH), Merrill Lynch (MER...soon to become a piece of Bank of America/BAC), American Insurance Group (AIG...now 80% owned by the Federal Government), etc.

In attempting to quickly assess the potential Ramifications of a WOUNDED Wall Street to NEW YORK's economy (and therefore to New York's real estate market), it should be noted that per August 2008 comments from Thomas DiNapoli (the 'Comptroller of the State of New York'...also commonly referred to as the 'Chief Fiscal Officer of New York State') :

* Wall Street firms make up approximately 20% of New York STATE's total tax revenues

* Wall Street contributes about 9% of New York CITY's total tax revenues.


bloomberg.com/apps/news?pid=20601087&sid=aYhqIluVHh7U&refer=home


Data Courtesy: Realmoney.com (subscription only) + Bloomberg

EA Tells Take Two 'Game Over'...For Now

Due to a disagreement over PRICE, Electronic Arts (ERTS) announced yesterday that they are formally halting TAKEOVER negotiations with Take Two Interactive (TTWO). As a result of the news, shares of Take Two fell back to their pre-EA bid levels of about $17.00/share as investors reacted negatively to EA's bid of $25.74/share being taken off the table (think 'PRICE FLOOR').


http://www.bloomberg.com/apps/news?pid=20601213&sid=aprL_MNHg9ns&refer=home


Anecdotally reacting + per previous blogs posted on this subject (FYI, you can refer to them by clicking on 'Take Two Interactive' in the Archive Keyword Reference section on the right), while Take Two's volatile price action can OFTEN test one's resolve, I am still a firm believer in TTWO's fundamental growth story..whether the company remains independent or not. While my investing thesis related to the company being acquired may take a while longer to be realized, I am still quite confident that Take Two will eventually receive another TAKEOVER bid for its proprietary content in the rapidly growing and consolidating video game industry.


BOTTOM LINE - I view the ERTS related sell-off as an OPPORTUNITY similar in SCOPE to the one that was presented to investors of Take Two around this time just LAST YEAR (the company's shares OVERreacted to GTA 4's delay last July and declined violently in a 3 week stretch from $20.05 a share on 7/27/07 to $12.25 a share on 8/17/07...a 40% drop in 3 weeks!). I plan to add to my small-ish position once the stock and broader market shows signs of stabilizing (in VOLATILE times like these PATIENCE is most certainly an investing virtue).


Data Courtesy: Bloomberg
Full Disclosure: I own shares of TTWO.

CHART - U.S. CNG 'Gas Stations' By State

As the T. Boone Pickens 'Natural Gas fuel for vehicles' Plan continues to gain traction (California will be voting in November on a new $5 Billion natural gas vehicle SUBSIDY bill), check out the below U.S. Department of Energy CHART detailing the approximate amount of Compressed Natural Gas Fuel-Filling Station locations by STATE (FYI + as hinted above, CNG or Compressed Natural Gas is a fossil fuel substitute for crude oil-derived gasoline) :

* Anecdotally thinking, looks like the country has a ways to go in terms of achieving MASS ADOPTION of Natural Gas Fuel Stations...smells like a HUGE opportunity for SOMEONE including T. Boone Pickens and his speculative natural gas fuel service company Clean Energy Fuels Corp. (CLNE)...Makes sense that California leads the country in natty gas fueling stations when considering its $5 Billion subsidy proposal...Interesting to see that New York, Utah and Oklahoma make up the next largest group of Natural Gas 'gas station' states


http://www.eere.energy.gov/afdc/fuels/natural_gas_locations.html


Data Courtesy: U.S. Department of Energy
Full Disclosure: I own shares of CLNE.

CONOCO Goes Long L-N-G For $8 Billion

In a possible sign of things to come for the still emerging L N G energy industry, Conoco Phillips (COP), the U.S.'s 2nd largest Natural Gas producer and Crude Oil Refiner, is investing $8 Billion in a Liquefied Natural Gas joint venture with Australia's Origin Energy Ltd. The business will focus on converting Coal-seam gas into Liquefied Natural Gas for sale/export to Asia. Conoco's 50% stake in the J-V will entitle the company to a 50% ownership interest in Origin's 'Gross Resource' (think 'Reserves') of 42 Trillion cubic feet of Coal-Seam Gas.

As power producers switch to cleaner fuels, Citigroup's research arm forecasts LNG demand will increase by 10% a year through 2015...more than 5 times the projected demand growth of Crude Oil (RTOB: makes sense as Crude Oil has such a HUGE existing 'demand base' relative to LNG...given current demand levels, it would take something extraordinary for global crude oil usage to spike 10% a year...production capacity constraints would never allow supply to accommodate 10% growth anyways). FYI + According to Bloomberg, LNG is Natural Gas that has been chilled to liquid form, reducing it to 1/600th (one six-hundredth) of its original volume at minus 161 degrees Celsius (minus 259 Fahrenheit), for transportation by ship to destinations not connected by pipeline. The gas is odorless, colorless, non-toxic and non-corrosive. On arrival, it's turned back into gas for distribution to power plants, factories and households.


http://www.bloomberg.com/apps/news?pid=20601087&sid=a0aFYl4uRBO4&refer=home


Additional points per the link above:
* At a marketcap of $15 Billion, Origin Energy Ltd is Australia's Largest Producer of Gas from Coal seams...coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced (usually after water is removed)


* The companies plan initially to build 2 LNG 'Production Units' (plants), each with a capacity of 3.5 million metric tons a year, with deliveries scheduled to start by 2014


* Origin Energy will operate the coal-seam gas production part of the venture, while Conoco Phillips, which already operates an LNG plant in northern Australia, will operate the LNG output.



Data Courtesy: Bloomberg
Full Disclosure: I own shares of COP.